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Picking winners

Any obvious attempt by the US government to steer the economy is seen as an infringement on individual liberty.
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In the US, the ‘land of the free’, many assume that the government’s role in the economy is limited to providing the market’s infrastructure and legal framework alongside a modest social safety net. But a new paper from Professor Robert Wade argues that the free market rhetoric masks a fundamental truth about the American economy — the state has a long history of economic intervention to direct economic growth.

‘Industrial strategy’ is broadly defined as a set of government policies designed to increase the performance of the economy, often featuring public-private partnerships and targeted state investment. Some of the world’s most successful economies — Germany, Japan, South Korea, and the Scandinavian nations — are all well-known followers to some form of industrial strategy.

Professor Wade of the Department of International Development argues that a less well-known example is the case of the US, where government agencies have long supported parts of the economy to increase their productivity. 

The reason that this form of government involvement in the economy is often carefully hidden from view is because of the free market doctrine, which enjoys a revered status in the American psyche. Professor Wade says: “The US has had a pervasive ideology which celebrates independence and liberty, and citizens are free to exercise choices within the market. There is a maxim that more choice is always better.”

The average US citizen remains wary of any visible attempts by governments to use their powers to curtail freedoms. “In this climate of ideas, any obvious attempt by the government to steer the economy, through incentives and taxes, is seen as an infringement on individual liberty,” Professor Wade adds.

The free market doctrine conceals the fact that various agencies of government, prominently in the defence, energy, pharmaceutical and information and communication technology sectors, enjoy a productive relationship with private enterprise. Ironically, this relationship blossomed at the height of the free market zeitgeist, from the 1980s onwards.

Professor Wade says: “As information and communications technologies made offshoring of production and jobs easier, vital sectors within the US began to erode. For example, at one point in the 1980s, the US economy contained virtually no manufacturing of semi-conductors.”

“The machinery makers were all Japanese, who held back their most advanced machines for testing by Japanese semi-conductor makers, putting American rivals at a serious handicap. Similar trends were occurring in other leading sectors.  So US technologists and scientists responded by encouraging state-level agencies to foster domestic high-end innovation and production.”

Eventually, military agencies realised that rather than contract with big-name firms, which would then subcontract to smaller start-ups, it was more efficient to go directly to the start-ups. They created venture capital funds to invest in them directly and influence their innovation stream, creating a form of state venture capitalism.

Professor Wade argues that this amounts to a powerful industrial investment strategy, but one which is not centrally coordinated, in contrast to the investment strategies of the “developmental states” of Japan, South Korea and Taiwan.  Because it was deliberately kept uncoordinated and low profile, the industrial investment strategy remained obscure to many economists, political scientists and politicians.

Since the global financial crisis of 2008, the sands in the US appear to have shifted, with a greater willingness to acknowledge that government intervention may be warranted following acute market failure. Political rhetoric has also changed, with President Donald Trump, and to a lesser extent his predecessor Barack Obama, emphasising how government can help restore manufacturing jobs.

Professor Wade says: “A high proportion of these activities are called ‘green’. This works in the same way that the military label works; it makes them more acceptable to citizens, less of an infringement on market freedoms.”

Yet the US investment strategy is timid when set against the big social challenges faced by the US and many other societies. These include decarbonisation and the health and social care needs of an ageing population. According to Professor Wade, some form of national investment strategy will be required to meet some of these tests.

In this context, investment strategy is not a single strand of policy, but an approach to economic policy in general, based on exercises that individual firms or sectors do not normally undertake.

Professor Wade says: “The idea is that you act now to improve the growth and employment prospects of the future. Certain important figures in the British government have shown they are sympathetic, but the ideological opposition in the UK, and the US is still very strong.”

For some commentators, Trump’s stunning victory in the 2016 US presidential election, reflected a growing anger that the economy was no longer working for large sections of the population.

Professor Wade says: “There has been very low economic growth in many countries since 2008, coupled with surging income and wealth concentration in the hands of the top one per cent which accrued almost all of the growth, leaving most of the population on stagnant or declining incomes.

“This has produced a big shortfall of demand relative to supply capacity; which caused high unemployment and a rise of employment in insecure, low-paid work. These developments have fuelled a pervasive, self-protective impulse through large sections of western populations, manifesting in intolerance.

“For example, immigrants, the LGBT community, distrust of key institutions such as the courts, parliament, political parties, banks, and the media have all been targeted. We have also seen a desperate search for ‘strongman’ or ‘strongwoman’ leaders to restore order with a big stick.”

“This trend is already only too apparent; the question remains where this political momentum will take us, and how our governments will respond.”

Behind the article

 

 

The American paradox: ideology of free markets and the hidden practice of directional thrust by Professor Robert Wade was published by Cambridge Journal of Economics in February 2017.